05.07.2018 News

Vanity versus Sanity

We’ve all heard the mantra, “Cash is King”, usually in the context of a Dragon’s Den style pitch, or a grilling of a very uncomfortable sales exec or middle manager.

And yes, it’s a well-worn phrase that, in many circumstances, has lost its impact. However, let’s think about it in a little more detail. What does it actually mean? What are the implications? And, crucially, why is it still important?

Taking each of these questions in turn, let’s consider firstly what the phrase means. Okay, so, cash in hand is the ultimate liquid asset, there’s little doubt. And that means that, if a business ever encounters an emergency, money in the bank is truly like gold. In essence, having an asset such as property is very much a poor relation to having cash. Think about it - if you have property, whether commercial or residential, in order to realise its value, it has to be sold. And selling a property or other such asset takes time.

Moreover, an asset is only worth what someone at any particular moment is willing to pay. Equally, don’t forget that a ‘fire sale’ or a more desperate transaction will only realise a lesser amount. That’s why banks will only loan a certain percentage of the value of property or book debts or such other asset. They always have in mind that they may need to realise the liquid value of that asset urgently.

So, having established that inalienable truth, where does the importance of the opening article headline sit? The simple answer is, it’s actually part of a larger phrase that has become a pithy business aphorism that has endured over many decades.

The initial part of the phrase - as may already have dawned on our readers - is “Turnover is Vanity”. Yes, you read this correctly - many businesses use turnover and the year on year increases therein, as an indication of business growth. Yes, it’s true, we can use this as one of a basket of financial indicators that demonstrate growth and success. But, the increase in turnover has to be considered within the context of other indicators.

 After all, what’s the point of a 30% increase in turnover, driven by a comparable increase in sales, unless, it fuels an equivalent enhancement in overall profit? Think on - if your overheads increase to such a degree that they swallow any profit increase, you’ve achieved precisely nothing by increasing your sales. Seriously, there’s no logic in ramping up sales by £30k if there’s an equal upward sweep in your costs, whether fixed or variable.

So, onto the next part of the phrase - “Profit is Sanity”. Yes, that’s absolutely right, what we’ve mentioned in our last paragraph is entirely correct. The unarguable point is that, if your sales go up at the same level as your costs, you’re only making yourselves busier, with no positive impact on your bottom line. And, equally, you’re making your cost per unit or man-hour greater. Something has to give - and in many small businesses it’s either a cash-flow crisis or even a staff issue. And that can be the MD, owner or founder. In other words - it could be you. And not in a good sense, either.

So, remember, when you’re looking at putting strategies in place to increase sales - and hence turnover - think about whether they’ll actually enhance profit. And also be aware of how they might appear to potential investor or buyer of your business. And, if in doubt, talk to one of ou team of experts. They’re always on hand and will help guide you through the wilderness.